That’s a great question, and there is no easy answer. This may clarify it a little:

As individual taxpayers Romney and Buffet pay so little in taxes because of two sources of income:

  1. They take qualified dividends from their corporations that they own or are investors in.
  2. They take Capital Gains distributions from investments they have created

For qualified dividends, between 2001 and 2012 they were taxed at 15% (now its 20%), regardless of what tax bracket you were in. Although it seems like a relatively small amount of tax, before any shareholder is able to receive and pay tax on those dividends, the corporation had to pay a tax on that as well (somewhere in the ballpark of 35-40% usually). This is where double taxation occurs. If the company is a foreign company, lets use the Netherlands as an example, they only charge 3-4% taxes on that income, then it gets distributed to Mr Buffet, and he only pays 15%. Heck of a deal.

For capital gains, the maximum rate from 2001-2012 was 15% (now its 23.8%). For investments in a “small business” (a company that has less than 50 million in assets), sale of any stock provides a tax deduction of 50% of that sale, this means that sale is now only taxed at 7.5%… wow. This is why there are so many venture capital firms.

In addition to this, they can also take advantage of investments made in countries with favorable tax laws. Both store a good chunk of their money in overseas, tax favorable bank accounts and investments. Though a slipperly slope for US tax law, many ultra rich investors have many advisors that make it legal. To explain fully would require a whole other blog post.

So as you can see, using those two methods, Buffet and Romney were able to keep their upper tax limit to around 15%, then using deductions, like donations, property taxes, etc, they dropped their tax rates to around 11-12%.

That is only for their individual rates, below is how they win with their corporations:

Huge corporations use a combination of tactics to keep tax low, but the latest and greatest is setting up shop overseas in a “tax haven” country. For example, Ireland made a deal with apple so that they would only charge 3% in taxes on ALL of their worldwide appstore sales. That’s almost a billion dollars in sales a year that they only pay 3% tax on. In comparison, the US would charge 35%.

The research and development credit allows for a very good option too. An example of the extraordinary benefits of the R&S Credit includes the fact that Boeing reported a $20 billion dollar pre-tax income, yet they received a refund from the government of $110 million. Also the new Domestic Production Activity deduction allows a very large deductions as well, most US based companies can access that.

I’ve researched this stuff a lot, mainly because I want to be in the business of offering these options to small businesses and startups, as well as people who may not be as wealthy as Mitt Romney.

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